Cap on Savings Raises Industry Hackles

Several advocacy organizations—ERIC,
ICI and ASPPA—issued statements weighing in on President Obama’s proposed fiscal 2016
budget, with adjectives and comments such as “misses the mark” … “wrongheaded” …
“disappointing.”

All expressed disapproval at the idea
of limiting the amount savers may stash, pre-tax, in retirement accounts, a
savings cap that resurfaces annually.

Judy Miller, director of retirement
policy for the American Society of Actuaries and Pension Professionals (ASPPA),
maintains that some parts of the budget could expand retirement plan coverage,
but others are likely to undermine them.

ASPPA favors the president’s
proposals to encourage workplace retirement plans. Employers with 10 or more
employees and no retirement plan would be required to offer a workplace
auto-IRA (individual retirement account). Employers that do offer these programs
would receive an enhanced tax credit.

Also, Miller notes in her statement,
the budget would triple the start-up credit for qualified retirement plans and,
for the first time, offer a credit of $1,500 to small-business owners who add
automatic enrollment to an existing 401(k) plan. “These are all good ideas,”
Miller says. “Why couple these proposals to expand coverage with proposals that
would discourage small-business owners from maintaining the 401(k) plans they
have now?”

According to Annette Guarisco Fildes,
president and CEO of The ERISA Industry Committee (ERIC),
the proposal to cap benefit amounts in tax-favored retirement plans and IRAs
misses the mark and should be rejected.

“The proposal would create a
disincentive for retirement saving, as well as a compliance nightmare for plan
sponsors and retirement savers alike,” Fildes says. “Tax-favored retirement
savings accounts already have strict limits on the amount of annual benefits
and contributions that may be made by employers and employees. Policymakers
should be considering ways to expand and not discourage savings opportunities.”

The Investment Company Institute
(ICI) also strongly opposes the limits. Paul Schott Stevens, president and
chief executive of ICI, calls policy changes of this kind “simply wrongheaded,”
and recently released an annual household survey that shows Americans oppose changing the tax incentives for retirement savings.

According to Stevens, the proposals
would penalize workers trying to save for retirement and discourage employers
from offering plans, while adding unnecessary complexity to retirement saving.
Instead, the government should be encouraging more employers to offer plans and
giving more workers incentives to participate in workplace-based retirement
plans.

“To its credit, the administration
recognized the importance of saving for the future when it retreated from a
proposal to impose new taxes on college savings accounts [529 accounts],” Stevens
says. “Maintaining current tax incentives that help Americans prepare for retirement
is just as critical.”

Miller points out that Obama’s own pension, based on reasonable actuarial assumptions, is worth
about
$5 million. “Why is a $3 million cap considered appropriate for a
small-business
owner who has saved on [his] own for retirement?” she asks. “Worse,
under the ‘double
taxation’ budget proposal, small-business owners and others earning more
than $250,000 would have to pay tax on contributions in the year the
contributions
are made and then pay tax at the full rate when contributions are
distributed
at retirement.”

This would amount to a penalty for
saving through a 401(k) plan, Miller contends. “If a small-business owner is
going to be penalized for saving in a plan, or not allowed to make additional
contributions to that plan, what’s [his] incentive for continuing to
participate in, and ultimately even offer, these plans?” Employees who lose
access to saving through a retirement plan at work would be the real losers in
this scenario, she says.

The budget would also allow the
Pension Benefit Guaranty Corp. (PBGC) to set risk-based premiums based on
its determination of the creditworthiness of a plan sponsor, which ERIC
strongly opposes as an inappropriate and impractical expansion of government
authority that would hurt plan participants and plan sponsors.

“This proposal continues to resurface each year,” Fildes says. “Putting the PBGC in charge of determining not
only the amount of the premium that individual employers pay, but also the
means by which they are set—with no effective oversight from Congress or
another neutral party—would create a direct conflict of interest.”

The budget would raise the tax rates on capital gains and dividends, which, ICI says, are critical to investment and
savings opportunities. “The effective tax rate on investment income already has
increased substantially under President Obama,” Stevens says. “ICI has long
advocated for lower taxes on capital gains and dividends earned by
investors—Americans who are saving for college education costs, a home
purchase or other financial goals. The administration’s piecemeal approach of
increasing tax rates on capital gains and dividends once again simply
underscores the need for a comprehensive tax plan designed to stimulate
economic growth and not simply punish the nation’s savers and investors.”

Fildes says that ERIC supports the administration’s underlying goals to expand access to, and the portability of,
retirement savings, but cautions that policymakers should first do no harm.
“Unnecessary and complex administrative burdens undermine the ability of large
employers to provide robust and tailored retirement benefits to their workers,”
she says. “ERIC is committed to preserving and enhancing the successful
voluntary employer-sponsored retirement system.”

The U.S. retirement system is already
working well for millions of Americans, Stevens says, with retirement tax
incentives the key to the system’s successes and strengths.

Miller notes that the $3 million cap
has found its way into past budgets but not into any legislative proposals.
“Unfortunately, the same cannot be said for the double-taxation proposal,” she
says.

A failed proposal in the last Congress by
then-Chairman of the House Ways & Means Committee Dave Camp, R-Michigan,
would have double-taxed both employer contributions and elective deferrals.
“The president’s proposal to double-tax elective deferrals could still be
tempting to some looking to raise revenue but who may not fully appreciate the
impact of that change on plan formation or employer support for these programs,”
Miller says.